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Initial Public Offerings, Subsequent Seasoned Equity Offerings, and Long-Run Performance: Evidence from Ipos in Germany A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bessler, Wolfgang; Thies, Stefan Article Initial public offerings, subsequent seasoned equity offerings, and long-run performance: Evidence from IPOs in Germany Journal of Entrepreneurial Finance, JEF Provided in Cooperation with: The Academy of Entrepreneurial Finance (AEF), Los Angeles, CA, USA Suggested Citation: Bessler, Wolfgang; Thies, Stefan (2006) : Initial public offerings, subsequent seasoned equity offerings, and long-run performance: Evidence from IPOs in Germany, Journal of Entrepreneurial Finance, JEF, ISSN 1551-9570, The Academy of Entrepreneurial Finance (AEF), Montrose, CA, Vol. 11, Iss. 3, pp. 1-37 This Version is available at: http://hdl.handle.net/10419/55940 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Initial Public Offerings, Subsequent Seasoned Equity Offerings, and Long-Run Performance: Evidence from IPOs in Germany Wolfgang Bessler* Center for Banking and Finance Justus-Liebig-University Giessen, Germany Stefan Thies** Fielmann AG, Hamburg, Germany The objective of this study is to investigate the long-run performance of initial public offerings (IPO) in Germany for the period from 1977 to 1995. Of particular interest is to examine whether underpricing and the timing of subsequent seasoned equity offerings (SEO) may help to explain why some firms have substantial positive and others have substantial negative long- run abnormal holding period returns after going public. We find significant empirical evidence that firms that raised additional funds after an IPO through a seasoned equity offering outperformed the market. There is a significant difference in returns relative to the firms that * Wolfgang Bessler is Professor of Finance and Banking at the Justus-Liebig-University Giessen, Germany. His research interest includes venture capital, initial public offerings, dividend policy, asset pricing models, and bank management. Before joining the University of Giessen he held positions at Syracuse University, Rensselaer Polytechnic Institute, and the Hamburg School of Economics and Business. He has published in the Journal of Banking and Finance, Journal of Financial Markets, Institutions & Money, European Journal of Finance,Financial Markets & Portfolio Management, European Journal of Operational Research, and OMEGA, among others. He is associate editor of the European Journal of Finance, Journal of Multinational Financial Management, Financial Markets & Portfolio Management, Zeitschrift für Bankrecht und Bankwirtschaft, and the Journal of Entrepreneurial Finance and Business Ventures. ** Stefan Thies is member of the executive board of Fielmann AG, Germany. Before joining Fielmann, he was consultant with McKinsey & Comp., Inc and Research Assistant at the Hamburg School of Economics and Business and the Justus-Liebig-University Giessen, where he received his Ph.D. His research interest includes initial public offerings, sequential financing decisions, agency problems, and cost of capital. He has published a book on Financing Decisions, Information Asymmetry, and Long-Run Performance as well as articles in Managerial Finance, Finanzbetrieb, and the Handbook of Corporate Finance, among others. 2 Initial Public Offerings, Subsequent Seasoned Equity Offerings…(Bessler and Thies) had no subsequent equity offering. A comparison of seasoned equity offerings of IPOs and of established firms suggests that the information asymmetry is more pronounced for IPO firms. I. Introduction The decision of many companies to go public and the short- and long-run performance of newly issued equities have been of significant interest to investors and academics alike. This interest may be related to the importance of Initial Public Offerings (IPO) for economic growth and employment. More importantly, however, the specific return behavior or “market anomalies” of IPOs created, on the one hand, immense profit opportunities for investors and, on the other hand, tremendous risks. Consequently, a large number of theoretical explanations have been developed and many empirical studies conducted to explain this phenomenon. In particular, empirical research has investigated the underpricing and long-run performance of Initial Public Offerings (IPOs) in the United States and in other countries (Loughran and Ritter, 1995). As a result, a relatively consistent pattern of underpricing, initial returns, and long-run performance of IPOs has emerged. For most countries these studies find significant underpricing in the primary market and consequently substantial initial returns in the secondary market. In contrast to the almost certain short-run outperformance of IPOs there is, on average, a substantial underperformance over longer periods. For the German capital market there have been a number of empirical studies that analyze the underpricing and long-run performance of initial public offerings (Stehle and Ehrhardt, 1999; Ljungqvist, 1997; Stehle et al., 2000; Thies, 2000; Kurth, 2005; Bessler and Kurth 2007; Bessler and Thies, 2007). These studies, however, provide some conflicting results such as huge spreads in underpricing within analyzed periods as well as long-run underperformance and neutral performance dependent on the benchmark used so that a number of open issues remain and await empirical explanations. The objective of this study is to add to our understanding of the return behavior of initial public offerings by investigating the long-run performance of IPOs in Germany for the period from 1977 to 1995. The focus of this study is on the impact that seasoned equity offering (SEOs) have on the long-run performance of IPOs. The IPO market in Germany is of special interest for a number of reasons. First of all, the banking system, the legal system, as well as the corporate governance structure are viewed as different from that of the United States so that some different results may be expected. In fact, some earlier empirical studies for seasoned equity offerings report opposite empirical results for Germany than usually found in studies for the United States. Smith (1986), for example, documents positive abnormal returns for the announcement period of SEOs in the U.S., while Brakmann (1993) and Padberg (1995) report positive announcement returns for SEOs in Germany. Secondly, the number of companies that went public in Germany and the amount of equity that was raised through an initial public offering was relatively minor compared to that of the United States and some other countries despite the size of the German economy. Hence, we may expect some different results. Moreover, most of the firms that went public up to 1995 were not high-tech start-up companies but often were already established firms with an average age well above 20 years (Ljungqvist, 1997). These firms may be easier to value, again resulting in different empirical findings. The rest of the paper is organized as follows. In the next section the literature for IPOs is reviewed with an emphasis on underpricing and long-run performance. The methodology and data are explained in section 3. The empirical results are presented in section 4. These results are separated into sensitivity to the benchmark, influence of the underpricing, performance of The Journal of Entrepreneurial Finance & Business Ventures, Vol. 11, Iss. 3 3 IPOs, impact of seasoned equity offerings as well as a comparison of subsequent financing decisions of IPOs and established firms. The last section concludes the paper. II. Literature Review Beginning with the seminal paper of Modigliani and Miller (1958) there is an enormous amount of literature that deals with financing decisions and financing behavior of firms. The pecking order theory (Myers and Majluf, 1984), the cash flow shortfall theory (Miller and Rock, 1985), and the free cash flow hypothesis (Jensen, 1986) are among the most dominant theories. They all base their arguments on information asymmetry and agency problems. In these models it is assumed that management has an information advantage over investors. Financing decisions are therefore viewed by the market as a reliable signal about the firm’s quality. Myers and Majluf (1984) argue that financing decisions reveal information to the market because the decision to issue equity signals that the firm is overvalued. Consequently, issuing equity should result in negative valuation effects at the announcement date (short-run). Miller
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